The Disruptive Business Model that Could Change the Tablet Market

One of the most interesting things about the tablet market these daysbesides the fact that Apple basically owns itis that in the very near future, I believe there will be two very different business models that will drive tablets into the broader consumer market.

The first model, the one Apple uses today, is very traditional. In this case, Apple makes the iPad and then sells it through its retail stores, its online store, and various third-party resellers like Best Buy and Target. If the iPad has a 4G modem in it, it is also available through carriers like AT&T and Verizon. Samsung and other Android vendors also use this business model and when Windows 8 tablets come out, most of them will sell those tablets in a similar way.

A second business model, called subsidization, is also unfolding and is already in use by the carriers to sell cell phones. Apple, for example, sells an iPhone to the carriers for somewhere around $600 but they in turn only charge the customer $200. They basically subsidize the upfront cost of the phone and earn back this cost by tying a user to a two-year service contract to amortize their cost of the iPhone to Apple. In fact, carriers have been using this subsidization model to sell phones for a long time and when the iPad came out, some customers expected the carriers to subsidize the iPad similarly. That did not happen, however, and customers basically buy the iPad at full retail price.

Still, there is a different kind of subsidization model that will be very disruptive in the future when it comes to selling tablets. Amazon's Kindle Fire is a good example. The Kindle Fire sells for $199, but sources tell us that its bill of materials (BOM) is at least $209. Amazon is willing to sell it at $199 because it expects a Kindle Fire buyer to purchase perhaps 10 ebooks, rent at least five movies, and buy various products from the Amazon store. Amazon can then amortize against the actual cost of the tablet and make a profit.

Amazon, though, doesn't have a patent on this model. Google will soon release a tablet and it is rumored to be priced around $149. I am certain, however, that the BOM cost of this tablet will be at least $179, if not more. The reason it could release a tablet below cost is because of this subsidization model. Like Amazon, Google has products in Google Play and can even amortize some of its ad profits to cover the cost and turn a profit.

If this model works for Amazon and Google, perhaps it could also work for Walmart. The company already has many of the things needed to do what Amazon does: an e-commerce store for all of its products, digital movie rentals, and digital music sales. It also has the physical storefronts to back this up. It could count on the fact that its customers will buy even more products if they own a Walmart tablet that makes it really easy to buy ebooks, music, movies, and products from its online store. Walmart could also use the tablet as an advertising vehicle for special offers. Maybe Walmart would sell its own subsidized tablet for $99or even give it away for free with special promotions. Now, I have no knowledge of whether Walmart is brewing anything like this, but it is one of the companies that could exploit this tablet business model for its own purposes.

Take Proctor & Gamble as another example. It has more than a hundred products it would like to sell you through its retail partners. What if the company could build and brand a reasonably priced P&G tablet and then use it to drive promotions to users to help subsidize part of its cost. From the customers' standpoint, the Web apps drive their broad content and apps needs, but by offering the tablet at a discounted rate, P&G would have a captive audience willing to get ads in exchange.

In the near future, this subsidization model will cause customers to think very differently about tablets. As a result, I can foresee a future in which families might have four or five scattered around the housesome subsidized by various vendors so that owning more than one is the norm. And while the operating system may still be important to handle localized apps for some users, the most-used feature will be the Web browser and Web apps tied to the cloud where most of their personal digital life will reside.

The bottom line is that today's tablets are great and, thanks to Apple, the role they play in our lives is broadening. But there could be a brave new world developing in which the tablets of the future will just be screens that use Web browsers to connect you to everything you need from the cloud. Thanks to subsidization, they'll be cheap enough that you'll have multiple throughout the home at your disposal. When you need to use a tablet, you'll just pick up the one that's closest to you.

Tim Bajarin is one of the leading analysts working in the technology industry today. He is president of Creative Strategies (www.creativestrategies.com), a research company that produces strategy research reports for 50 to 60 companies annuallya roster that includes semiconductor and PC companies, as well as those in telecommunications, consumer electronics, and media. Customers have included AMD, Apple, Dell, HP, Intel, and Microsoft, among many others. You can e-mail him directly attim@creativestrategies.com.

Tim Bajarin is recognized as one of the leading industry consultants, analysts, and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba, and numerous others. Mr. Bajarin is known as a concise, futuristic analyst, credited with predicting the desktop publishing revolution three years before it...
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